Trusts Flashcards
What is needed to create a valid trust?
- a settlor w/ present intent to create a trust
- a valid trust purpose
- trust property (res)
- trustee (court can appoint one)
- ascertainable beneficiaries
“to create a valid trust, there must be a settlor who, intending to create a trust for a valid trust purpose, delivers the trust property to the trustee to hold for the benefit of one or more ascertainable beneficiaries”
Merger of Title
A trust will be terminated where the sole Trustee is also the sole Beneficiary
so if one party is both a trustee and beneficiary, title will NOT merge only if there are other beneficiaries of the trust (needs to be SOLE trustee and SOLE beneficiary for merger and thereby termination)
Trustee
the trustee holds legal title to specific property under a fiduciary duty to manage, invest, and administer the trust assets and income for the benefit of designated beneficiaries (who hold equitable title)
a trust will not fail for lack of a trustee (court will appoint one)
Trustee - fiduciary duties
- Duty of Care (duty to invest prudently)
- Duty of Loyalty (no self dealing)
- Duty to Perform trust duties personally
Trustee - Duty to Perform Trust Duties Personally
Traditional rule - trustee could NOT delegate investment decisions
Modern rule - Trustee may delegate investment/management functions but only if a prudent trustee of comparable skills could properly delegate under the circumstances
For delegation, Trustee must across prudently in:
1. selecting an agent
2. establishing scope and terms of delegation
3. periodically reviewing the agent’s actions
If delegation is proper, the Trustee is NOT liable to the beneficiaries for the decisions/actions of agent
Trustee - Duty of Care
requires Trustee to invest and manage the trust’s assets as a prudent investor would
Trustee - Duty of Loyalty
requires trustee to administer the trust solely in the interest of the beneficiaries
The trustee may NOT engage in self-dealing regarding trust assets. A trustee’s good faith or actual benefit to the trust is irrelevant
Evaluating the Trustee’s Investments
A trustee’s investments should NOT be evaluated in isolation, but should instead be evaluated in the context of the portfolio as a whole and as part of an investment strategy
Uniform Prudent Investor Act
Trustee must exercise reasonable care, skill and caution when investing trust assets
investment decisions are evaluated in context of the entire trust portfolio as part of an overall investment strategy
Trustee - duty to allocate property to principal and income
dictates whether receipts earned during the administration of the trust should be allocated to the income or the principal
most states have adopted the Uniform Principal and Income Act, which specifies how receipts should be allocated
General Rule: ordinary expenses should be allocated to income and extraordinary expenses should be allocated to the principal
Proper Allocations to Principal and Income:
Assets allocated to Principal (PLEAD)
- money received from Principal asset
- Life insurance proceeds
- Eminent domain awards
- All property other than money received from an entity
- Distribution of stock (stock dividend)
Proper Allocations to Principal and Income:
Assets allocated to income (RIM)
- Rental income
- Interest
- Money (includes cash dividends from stock)
Trusts - Revocability (Termination by Settlor)
If a trust is revocable, the settlor may terminate the trust at any time
In most states (UTC view), a settlor can revoke or amend an inter vivos trust unless the the terms expressly state that it is irrevocable
common law rule requires that the Settlor reserve the power to revoke/amend, and that a trust is irrevocable unless expressly stated otherwise in instrument
Trusts - Termination/Modification by the Beneficiaries with Settlor’s Consent
a trust may be terminated/modified if:
1. the settlor consents, and
2. all beneficiaries consent
this is allowed even if the modification/termination conflicts with a material purpose of the trust
Trusts - Termination/Modification without Settlor’s Consent
a trust may terminated/modified on the consent of just the beneficiaries if:
1. ALL beneficiaries give consent
2. and no material purpose of the trust would be frustrated (Claflin Rule)
If Claflin rule can’t apply (e.g. a beneficiary can’t consent), then look to if court has power to modify
Doctrine of Equitable Deviation: Modifying the Trust due to Change Circumstances
Common Law
If the Claflin doctrine can’t apply, try to use this analysis
At common law, a court in equity may authorize or direct a trustee to deviate from the administrative terms of a trust if
1. the Settlor did not know or anticipate the new circumstances, and
2. compliance with the terms of the trust would defeat or substantially impair the trust purposes
Usually, this doctrine of changed circumstances cannot be used to change the beneficial rights of the beneficiaries, but courts will often give power to invade the principal for an income beneficiary if it finds that supporting that B was purpose of trust
Doctrine of Equitable Deviation: Modifying the Trust due to Changed Circumstances
UTC
Under the UTC, court modification may be sought if the trust could have been modified if all beneficiaries had consented and the interests of any nonconsenting beneficiaries will be adequately protected
A court may modify the trust terms if circumstances unanticipated by the Settlor threaten the purposes of the trust
To carry out the Settlor’s primary intent, the court may ignore a specific direction of the Settlor and grant Trustee powers specifically prohibited in the trust
Under the UTC, there is no restriction against changing the beneficiaries’ rights. If unanticipated circumstances threaten the purpose of the trust, the court allows modification
Trusts - Terminating a Trust with contingent/unascertained beneficiaries
look out for a question involving termination/modification of a trust where there are unborn beneficiaries, unascertained beneficiaries, or beneficiaries of future interests
If any beneficiaries are unborn or unascertained, there must be a party appointed to represent their interests or they must be virtually represented according to state law
Otherwise, the trust may NOT be terminated/modified
Pour over provision in will
occurs where a will makes a gift to a trust
Traditional view: to create a valid pour over gift from a will to a revocable trust, the trust must be in existence or must be executed at the time of the will’s execution
Modern view: a will may devise property to a trustee of a trust established or to be established during the testator’s lifetime (i.e. the trust can be established after the will is executed but before the testator’s death)
modern approach is that later made amendments to the trust are valid. But old common law view was that amendments to the trust made after the execution of the will were NOT valid
pour over gifts are valid even if the trust is unfunded during the testator’s lifetime, and even if trust is amended prior to the testator’s death
Discretionary trust
in a discretionary trust, the Trustee has discretion to decide when to make a distribution to a Beneficiary
Beneficiary can NOT demand any disbursements. Neither can creditors (except for child support or alimony in some states)
beneficiary can only ask court to compel a distribution if the trustee has abused their discretion
Support Trust
type of trust in which the Trustee must pay what is necessary for the beneficiary’s support
Spendthrift trust provision
Restrains both the voluntary and involuntary transfer of a beneficiary’s interest. Therefore, the B can’t transfer their interest in the trust, and creditors also can’t reach the trust interest to satisfy their claims
purpose is to protect the B from their own improvidence
know that creditors can still reach the distribution from the trust AFTER it has reached Beneficiary (then it’s just the B’s property at that point)
but there are some exceptions to enforcement
Spendthrift Provision exceptions/limitations
These are some of the limitations on enforcement of a spendthrift trust
- when the Settlor is the Beneficiary (can’t use spendthrift to protect your own property)
- judgments/court orders for dependents (i.e. child support or spousal support)
- claims by the government
- claims by persons supplying necessities
Charitable Trust
trusts created for a charitable purpose
must have a large number of not readily identifiable individuals
the charitable trust may be terminated if the charitable purpose becomes unlawful, impracticable, or impossible (but be aware of potential for cy pres to save the trust)
